[Step-3] Determine Budget

Process of Aggregating estimated costs of individual work packages to establish an authorized cost baseline.  Establishes cost baseline against which project performance can be monitored and controlled.  A Project budget includes all the funds authorized to execute the project. The cost baseline is approved version of time phased project budget, but excludes management reserves.

Cost Baseline is the approved version of the time-phased project budget, excluding any management reserves, which can be changed through formal change control process only.
Cost Baseline is used as basis for comparison to actual results.

Work Package Costs


Sum Of work package wise estimates

Control Account Costs


Sum of All Work Package costs related to each Control Account

Cost baseline Cost


Sum of Control Account Costs + Sum of contingency Reserve where risks response planning is done




Project Budget


baseline + Management Reserve

Source PMP’s PMBOK
Project Funding Requirements: Project funding happens in steps i.e. on achieving of certain milestones.  Thus they are not continuous. This talks about at what timelines the funds get released and how we can manage the project expenditures with it.
Project Document Updates:  Updates to Risk Register, Activity cost estimates, Project Schedule etc.
Tools and Techniques
A. Cost Aggregation - The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.
B. Reserve Analysis: Contingency Reserves are approved for Known and Risks (i.e. Known unknowns) where risk response strategy is approved by steering committee - It is included as part of cost baseline -
Cost Baseline = Activity Costs + Contingency reserve costs
Management Reserve - For Unknown Unknowns (i.e. For Unknown Risks) (eg. Calamity, Earth Quake) - Not included as part of Cost baseline
Project Efforts = Cost Baseline Efforts + Management Reserve Efforts
Management reserve efforts are taken trough Change control procedure
C. Expert Judgement: Guided by historical information in an application area, knowledge area, discipline, industry.
Expert Judgement is available through:
v  Other Functional units within the performing organization
v   Consultants
v   Stakeholders, including customers
v  Professional and Technical Association
v  Industry Groups

D. Historical Relationships: Historical Relationships are used in Parametric Estimation models. Here we establish an semi empirical formula C [Cost] = A + (Parameter) * B where and A and B are constants
Parameter can be "Per Square Foot cost" in Construction, "Function Point", "use Case point" etc. If you observe above equation, A and B are derived based on Historical information and their relationship.
Parametric Models are accurate when
v  Historical Information used to develop the model is accurate
v  Parameters used in the model are readily quantifiable, and
v  Models are scalable, such that they work for large projects, small projets, and phases of a project.
E Funding Limit Reconciliation: It may happen that Project Aggregate Cost may be varying from Approved Project Funding Limits available. In such scenarios, we need to reconcile both such that they match. It can be done through either we should aim for increasing Funding Limit (or) we should aim to decrease Project Aggregate cost through scope cut etc.
A. Cost Management Plan - Describes level of detail necessary to carry out Cost management plan
B. Scope Baseline - WBS, deliverables, Constraints and Assumptions- Additional Info like contractual and legal implications such as health, safety, security, performance, environmental, insurance, Intellectual property rights, licenses and permits.
C. Activity Cost Estimates - Aggregate cost estimates of each activity within a work package to obtain cost estimate for each work package.
D. Basis of Estimates - Basic assumptions taken, Approach taken, Details on inclusons and exclusions of indirect costs in the project budget.
E. Project Schedule - Activities with Start/Finish Days, Durations and Resources loaded
F. Resource Calendars - Available working days or shifts on which each specific resource is available - Specify how long identified project resources will be available during the project.
G. Risk Register - To Estimate Risk Response Costs - Risks which can be either Threats or Opportunities have an impact on both activity and overall project costs.